Estate Planning 8
Sustainable Civilization: From the Grass Roots Up Estate and Financial Planning - Providing Assets for the Future - 2 - 3 - 4 - 5 - 6 - 7 - 8 So, how do you get a home? Inherit It. From an economic standpoint, it should seem strange that you need to make a large cash outlay to acquire a home. What happened to the home of your parents, your grandparents, great grandparents, etc.? In ideal economic theory, the family home, or at least the economic value of one, should continue to be passed on within the family, with each generation not only maintaining the home, but providing enhancements. Theory fails however in the "real world" for various reasons. Liens against the property (involuntary and voluntary). The property was not maintained, or is located in a declining community. The heirs "squander" the inheritance. There are too many heirs. In theory, a family of two children can pass on to each child the averaged inheritance of the parents. A family with one child accumulates assets. A family with more than two children dilutes assets. Buy it. The typical "first thought" to purchasing a home is the local real estate agent. If you contact the firm that is the "listing agent" for a particular piece of property, keep in mind that the listing agent is required to represent the interests OF THE SELLER. In general, the same rules apply to all sellers' agents. While selling agents are prohibited from knowingly providing false information, they cannot represent your best interests. Even if they know that a property is not, per the market, worth the asking price, they won't tell you. Employ a "Buyers Agent". Typically, you make an agreement to pay this agent some type of flat fee for finding a property and helping to negotiate the best price for you. Employ a licensed "home inspector". You're looking for someone who can recognize the difference between faded paint, and a hidden leak. A comprehensive inspection report gives you a much improved "picture" of the home's condition, and the risks you take if your purchase it. Build it. If your day to day living needs are already being met, consider building your retirement home. When you buy an existing home, you purchase whatever mistakes and shortcomings the builder and previous owner made. If you build, you get to make all of your own new mistakes... or possibly, end up with a home that suits you perfectly, that can serve you and your heirs for a long time. Most current design and construction is focused on quick and easy methods, with superficial attention to quality and durability of materials, energy efficiency or orientation on the site. With appropriate design and construction, the operating and maintenance costs of your home can be greatly reduced below that which is the present "standard", and the home can remain a valuable asset for generations to follow. Repossessions / Seizures. There are various ways whereby homes are sold at below "market" rate. Bank Repossession. When a financial institution (i.e. a bank) forecloses on a mortgage, many times the company seeks to sell the property as quickly as possible. The same typically holds true for those who "guarantee" a loan (Veterans Administration, FHA, etc.), as well as law enforcement agencies (federal, state, and local) who seize property which was used to commit a crime. You will probably need to contact each such agency individually to determine what is available. Delinquent Property Tax. In Arizona real estate on which property taxes are delinquent are NOT sold outright. Rather, you must bid on the right to collect the tax lien. Once you have completed all of the legal prerequisites you may pursue a court case against the title holder to transfer actual ownership to you. Individual Retirement Account (IRA) Investment. If you've noted that the ability for an IRA to purchase real estate "pops up" throughout my financial planning articles, it's because I consider this one of the most significant opportunities available. Just as your TSP can be invested in a stock fund, or an IRA invested thru a brokerage can hold individual stocks, with the right IRA custodian your IRA can hold real estate as in investment in your account. Inflation protection. As described above, as a physical asset property provides a means to avoid loss of value of your money. It also offers real "upside" opportunity, with far less of "crashing". A stock, bond, mutual fund, etc. can readily plummet in value and essentially become worthless. It typically though takes a dramatic set of physical events for a given parcel of real estate to completely lose its value. Annuitization. I've made "side by side" comparisons of investing IRA funds in various annuity opportunities, vs rental real estate. Not only does the rental real estate typically provide a higher monthly return, but there is a physical asset which can be left to your heirs. Lawsuit Protection. Almost every state provides some level of protection for the real estate which is your home, typically referred to as "homestead". In Arizona $100,000 of the equity in your homestead is protected from being taken and sold in a lawsuit. But homestead protections typically do NOT apply to a property you are renting out. Your rental investment need different protection. For real estate, ANY real estate, held as an asset within your IRA, it has federal protection as a retirement account. Therefore even if you had $100,000 of equity in the home you're living in, if you had another $100,000 (or more) of equity in rental property, held within your IRA, it would also be exempt from being reached by someone who sues you. Factors to consider in a home. Energy Efficiency. You can pay now, or you can pay later, over, and over, and over... A poorly designed and constructed home probably requires heat in the evenings and winter, and cooling in the day and summer. A properly designed, oriented, and protected home can maintain comfortable internal temperatures without the need for large amounts of external energy input. Solar Orientation. Very modest differences can make a HUGE difference in the livability of a home, the size of HVAC unit required, and of course your utility bill. A large factor which must be taken into account is the change throughout the year in the path of the sun across the sky. While you can calculate the exact position for the sun at any time of the year, in general remember that in the summer the sun rises North of true East, and sets North of true West. Therefore East, North, and West walls and especially windows need vertical shade to protect them, and significant insulation. In the summer path thru the sky, the sun will shine directly on the south walls of a structure only during the noon hours, and from an angle high enough that modest overhangs can shade the south wall from the heat. In our Arizona climate, if mechanically and aesthetically practical the outer "roof" should be a well vented shade structure with an open air flow between it and the waterproof insulated ceiling of the living area. In the winter the sun will rise South of true East, and set South of true West. It will also rise to a maximum angle above the horizon which is much lower than it does in the summer. Therefore in the winter the south wall will be exposed to the sun the entire day. If the south wall is masonry, brick, adobe, etc. it will slowly warm during the day and release the heat thru the night. This storage of solar heat for slow release can also be accomplished by something like sliding glass doors on the south wall, with a concrete, brick, tile over concrete, etc. floor mass on which the wintertime sun can shine thru the glass. Solar Utilization. There are a great deal of published materials available, and a growing number of inventions for the use of the suns energy to heat, light, generate electricity, and even cool your home. Photovoltaic (p/v). In an area such as Arizona, where the largest demand for electrical power is when the sun is shining the most, p/v panels can make economic sense, even in an in-town, grid connected system, if the "return" on the money invested in the panels meets or exceeds the cost of present and future electrical utility rates. Example: A 120 watt p/v panel costs $489, and is warranted for 30 years. A reasonable average in our area is 6 hours of sun for 360 days per year. On the average, the panel can produce 21.6 kilowatt hour (kwh) per month. The present Yuma utility daytime charge is $.12 per kwh. Investing in the solar panel provides you an economic "return" on your investment essentially equal to a 5% tax-free account. If the utility rate increases during the next 30 years then your electrical power savings, and the effective return on your p/v investment also increases. Skylights. Beyond the primitive big hole in the roof, covered by glass or plastic, there are now devices which put a small clear dome on the outside of the roof with flexible mirrored "pipe" to allow the light to be routed to a selectively placed diffusion dome which can be mounted in the ceiling or in some cases the wall. The natural light brought in can easily save the "wear" on and power for an electrical bulb. Energy Cost Savings. An initial investment in energy conservation, or cost avoidance, can be the economic equivalent of a significant tax-free account. Example: At age 40, you've finished an active duty career and settled into your "retirement" home. You're sure that adding insulation in the attic would save $30 a month in utility bills, but the contractor wants $600 to do the job. Should you have it done? Certainly! The quick calculation "payback" period is only 20 months, after which that insulation goes on saving you money every month for as long as you live there. Think of it as putting $600 into an account that then pays you $30 per month for life. The value of such an upgrade is far greater than its cost. Materials Quality. You can buy, build, or remodel with quality durable materials and fixtures, or accept you will encounter the need for repeat repairs. Beware of Toxic Materials. There are various laws which require you be advised of certain hazards, such as whether the home has lead-based paint, asbestos, underground heating oil storage tanks, etc. There are though many dangers which are not required to be listed. You may want to run specific tests for hazards such as: Most particle board, adhesives, plastics, formed fiberglass items, foamed materials, etc. used in typical construction today releases dangerous gases, such as formaldehyde. Radon is a radioactive gas which seeps naturally from the ground in many areas. In some homes it enters thru foundation cracks and accumulates in the indoor air, reaching levels that can pose a danger, primarily to your lungs. Carbon monoxide is an odorless, colorless gas, which can kill. It is a natural product of any burning, therefore to the extent possible all flames should be kept outside of the weather-tight portion of the home. Mold. Relatively new to be recognized as a danger are certain varieties of mold, which can be toxic. While personal inspection, or the smell, may "give away" the presence of mold, proper testing can reveal the presence, and type, of mold when it is far below the threshold of detection by non-scientific means. Homeowners Associations. Whether buying a condo, or remote desert acreage, if there is a homeowners association, read the rules carefully before you buy. These associations MAY leave you alone. You may also find though that new "leadership" results in votes where you essentially lose control of "your" property. Zoning. City and County governments typically impose zoning ordinances, which control land use in the jurisdiction. If you're buying, do not rely solely on statements from the agent as to the status of the property. Maybe the agent does not know of changes, or forgot. Check the details. For example, if you buy to build yet find the property is just a bit too small for the current zoning to allow you to build, your options are to seek a variance (agreement by neighbors and the zoning board to change the rules just for you), or to sue the seller (But read your contract. I'll bet "due diligence' puts the burden on you to ensure you can do what you want BEFORE you close.) Permits. Related in spirit to zoning is the permit system. Imagine your surprise, after your purchase, to find the structures, or the sewage system, was put in without the right permits, and since it's out of compliance, you can't use it until you get a permit and fix it. Check that all that you believe to be part of the deal is legitimately there. Yuma in particular has areas where existing septic systems are for "new" owners suddenly found to have groundwater too close to the surface for the system to be used, requiring costly changes. Insurance. From the moment the home becomes "your's", you should ensure that it is properly insured. If your home burns to the ground, and you did not have insurance, this will NOT excuse you from making the mortgage payment! Typically, earthquake and flood insurance are not part of a "normal" homeowner's insurance policy. They must be added as separate additional charges. Yuma IS considered to be subject to earthquakes, and there are areas susceptible to flooding as well. Location. As I mention earlier, I would argue that a military career exposes you to a wide variety of communities, climates, and lifestyles, and provides you insight into where is a "good place to live". Beyond finding a community that has the right "feel" for you, consider: Cost of Living. Even if you manage to pay off your home prior to retirement, if you can't afford to live in the community after you retire, it may not be a good choice. Property taxes, income tax rates, and just simply the cost of day to day necessities are likely to continue to increase, probably at a rate faster than COLA for your pension. Even if we got a home in Beverly Hills as a gift, I doubt that many of us could afford to live there. Local Infrastructure. Does the area have the products and services you'll want to have access to? It can quickly become a "drag" to have to make long trips for simple supplies or services. In particular remember that in retirement you may need increased or quick response medical services, which might rule-out that mountain top retreat. Economy. If you intend to pursue a second career or sideline business, does the area have the need for your goods or services? Is the economic base of the community stable? (I.e. does it have a wide variety of income producing activities, or is the community dependent on the local gold mine, and the vein is almost exhausted.) Local Resources. Is there ready local access to water, food, reliable power generation, etc., or is for example the city water pumped hundreds of miles over the mountains, as is much of the Los Angeles water supply. In the event of a fire, flood, earthquake, transportation shut down, etc., does the community immediately become a disaster area, or is it likely to be the source of rescue activity? Natural Risks. The news clearly shows us that certain areas are at higher risk for fire, flooding, earthquake, tornado, hurricane, and even volcano activity. To be covered, most of these require a specific insurance policy. For example, if you're in a "flood plain", the federal government sells flood insurance policies, thru normal insurance agents. But why not look before you buy and avoid areas with recurring threats? Human Generated Risks. You certainly don't want to buy a home on top of another "Love Canal" site. (In New York, toxic waste was buried and then a housing development put on top of it.) You may also be concerned if there is a particularly noxious chemical plant, nuclear reaction location, etc. "upwind" from your contemplated home. Even major highways and railroad lines can be associated with risks, depending on what is being transported there and the likelihood of an accident causing a spill. FINANCIAL PLANNING YOUR CREDIT In our present economy, it's difficult to function without a good credit record. A bad credit history can prevent you from getting a loan for a car, a home, etc. Landlords may decline to rent to you if you are a credit "risk". Many federal positions, active duty or civilian require a security clearance. Credit problems can affect your clearance, and therefore your job. To find your present credit status, the three major national credit bureaus are: Equifax, P.O. Box 740241, Atlanta, GA 30374-0241; (800) 685-1111. Experian (formerly TRW), P.O. Box 949, Allen, TX 75013; (888) EXPERIAN (397-3742). Trans Union, P.O. Box 1000, Chester, PA 19022; (800) 916-8800. Federal Trade Commission (FTC) rules now clearly require credit reporting agencies to provide you a free report once per year. Online at http://www.equifax.com/ this particular credit reporting agency has a link listed as, "FACT Act and obtaining a FREE Credit Report". It requires you enter your personal information, after which you can view or print your credit report. FTC rules also require that these agencies must provide to you a free copy of your credit report, if you are: • Are unemployed and intend to apply for employment in the next 60 days • Are on public welfare assistance • Believe your file contains inaccurate information due to fraud • You are also entitled to a free report if you have received notice of an adverse decision (such as denial of credit, insurance, or employment) within the past 60 days How long is "bad" information going to remain in my report? Seven years, with some exceptions: Information about criminal convictions may be reported without any time limitation. Bankruptcy information may be reported for 10 years. Information reported in response to an application for a job with a salary of more than $75,000 has no time limit. Information reported because of an application for more than $150,000 worth of credit or life insurance has no time limit. Information about a lawsuit or an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer. What if my credit report is wrong? You are protected by the Fair Credit Reporting Act (FCRA), 15 U.S.C. 1681, et seq., which allows access to credit reports and an opportunity to correct errors, and the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. 1692, et seq., which limits the methods creditors can use to collect debts. How to "fix" an error on my credit report? First, don't bother with the "Credit Repair" advertisements. At best, they're charging you a fee for something you can easily do for yourself. At worst, they're a fraud. No one can legally make accurate, but "damaging", entries be removed from your record. Start by writing to the credit bureau(s) and to the firm that provided the erroneous entry. Tell them what you believe is wrong, why, and how the incorrect entry is causing you harm (i.e. you've been denied credit for a car or home, employment, rental opportunity, etc.) Send ALL communications via certified/return receipt mail. The bureau must reinvestigate you complaint, usually within 30 days, as must the information provider. If the information provider finds it made a mistake, it must notify all nationwide credit bureaus so that they can correct this information in your file. If they don't respond by 30 days, write again sending a copy of the first letter, demanding to know why you're being ignored, with, at your discretion, copies to the FTC and the state attorney general. If the investigation does not resolve the dispute in your favor, you should insist the bureau(s) include your statement of the dispute in your file and in future reports. Even if an entry is verified, you can also negotiate with the information provider. For example, if you have actually forgotten about a debt, perhaps you can persuade the firm to withdraw their "bad" entry if you pay the debt. Customer Service departments clear debts every day. If the firm agrees, if possible get them to send the agreement to you in writing. If not, when you send your payment, send it to whomever you negotiated with, include a letter clearly stating the agreed terms, and include on your check reference to the terms, including "aid in full account number…" if that is the case. This does not "guarantee" results, but is significant evidence in any subsequent court proceeding. What happens if someone else gets your credit card? As soon as you know your card is missing, notify the issuing institution. If a thief uses your card before you can notify the issuer, you may be liable for up to $50.00 of unauthorized use of the card prior to you making such notice. Finally, unless the card itself provides some means of identifying the holder, such as a photograph, no liability will be incurred for unauthorized use. Even if your card is not missing, someone may have still gotten your number. Whenever you get your statement, review the charges carefully. Thieves don't necessarily have to make huge charges, to rob you via your credit card number. "SPOOF" CREDIT CARD EMAIL If you receive an email, phone call, etc., that identifies itself as being from one of your credit cards, asking you to click a link, write back, or call, check your credit card first. If you are solicited to make contact in any manner other than calling the number on your card, please, first call the official number on your card to see if the request is legitimate. The computer fraud types apparently never sleep. Email requests, and the webpages at links in them may look authentic, but if you start entering your account number, personal information, and pin, you may find your account with surprise entries. Today, most credit card companies have computer programs that detect sudden unusually large charges activites, and put the account on hold, pending contacting you for potential fraudulent use. The new theft approach is to make small charges, on a lot of stolen account numbers. Would you notice a $9.95 charge to a store? If you lose your ATM card, the situation is different. If you report the loss before it's used, you're "safe". In general, if you wait to report the loss within: 2 business days you're responsible for up to $50.00 2 to 60 days you're responsible for up to $500 Over 60 days you're responsible for your entire account balance. Somehow, I missed payments on a debt. What can happen to me? If you fall behind in repaying your creditors, or an error is made on your accounts, you may be contacted by a "debt collector." You should know that in either situation, the Fair Debt Collection Practices Act (FDCA) requires that debt collectors treat you fairly and prohibits certain methods of debt collection. Of course, the law does not erase any legitimate debt you owe. Personal, family, and household debts are covered under the Act. This includes money owed for the purchase of an automobile, for medical care, charge accounts, etc. For purposes of the FDCA, a debt collector is any person who regularly collects debts owed to others. This includes attorneys who collect debts on a regular basis. A collector may contact you in person, by mail, telephone, telegram, or fax. However, a debt collector may not contact you at inconvenient times or places, such as before 8 a.m. or after 9 p.m., unless you agree. A debt collector also may not contact you at work if the collector knows that your employer disapproves of such contacts. You can stop a debt collector from contacting you by writing a letter to the collector telling them to stop. Once the collector receives your letter, they may not contact you again except to say there will be no further contact or to notify you that the debt collector or the creditor intends to take some specific action. Please note: Sending such a letter to a collector does not make the debt go away if you actually owe it. You could still be sued by the debt collector or your original creditor. If you have an attorney, the debt collector must contact the attorney, rather than you. If you do not have an attorney, a collector may contact other people, but only to find out where you live, what your phone number is, and where you work. Collectors usually are prohibited from contacting such third parties more than once. In most cases, the collector may not tell anyone other than you and your attorney that you owe money. Within five days after you are first contacted and if you dispute the debt, the collector must send you a written notice telling you the amount of money you owe; the name of the creditor to whom you owe the money; and what action to take if you believe you do not owe the money. A collector may not contact you if, within 30 days after you receive the written notice, you send the collection agency a letter stating you do not owe money. However, a collector can renew collection activities if you are sent proof of the debt, such as a copy of a bill for the amount owed. Debt collectors may not harass, oppress, or abuse you or any third parties they contact. For example, debt collectors may not: Use threats of violence or harm. Publish a list of consumers who refuse to pay their debts (except to a credit bureau) Use obscene or profane language Repeatedly use the telephone to annoy someone. Debt collectors may not use any false or misleading statements when collecting a debt. For example, debt collectors may not: Falsely imply that they are attorneys or government representatives Falsely imply that you have committed a crime Falsely represent that they operate or work for a credit bureau Misrepresent the amount of your debt Indicate that papers being sent to you are legal forms when they are not Indicate that papers being sent to you are not legal forms when they are. Debt collectors also may not state that: You will be arrested if you do not pay your debt. They will seize, garnish, attach, or sell your property or wages, unless the collection agency or creditor intends to do so, and it is legal to do so. Actions, such as a lawsuit, will be taken against you, when such action legally may not be taken, or when they do not intend to take such action. Debt collectors may not: Give false credit information about you to anyone, including a credit bureau. Send you anything that looks like an official document from a court or government agency when it is not. Use a false name. Collect any amount greater than your debt, unless your state law permits such a charge. Deposit a post-dated check prematurely. Use deception to make you accept collect calls or pay for telegrams. Take or threaten to take your property unless this can be done legally. Contact you by postcard. If you owe more than one debt, any payment you make must be applied to the debt you indicate. A debt collector may not apply a payment to any debt you believe you do not owe. You have the right to sue a collector in a state or federal court within one year from the date the law was violated. If you win, you may recover money for the damages you suffered plus an additional amount up to $1,000. Court costs and attorney's fees also can be recovered. A group of people also may sue a debt collector and recover money for damages up to $500,000, or one percent of the collector's net worth, whichever is less. If you elect not to sue a collection agency, you should still report any problems you have with a debt collector to the state Attorney General's office, both where you live and where the collection agency is located, and the Federal Trade Commission (FTC). Although the Attorney General and the FTC will not resolve individual problems for consumers, they can act against a company if they receive reports that show a pattern of possible law violations. OFFICE OF THE ATTORNEY GENERAL Consumer Information and Complaints 1275 W. Washington Phoenix, Arizona 85007-2926 Telephone: 1-800-352-8431 Consumer Response Center Federal Trade Commission 600 Pennsylvania Ave, NW Washington, DC 20580 Telephone: 1-877-382-4357 Debt Re-Negotiation. There are companies that promise to reduce consumers’ debt, negotiate with creditors, and stop harassment from debt collectors in exchange for various fees. Some such firms are legitimate and actually initiate active negotiations. I've also read of firms which are frauds, taking your fee, and simply sending your creditors a change of address, or other document such that you don't hear from the creditor again for some time - long enough for the "agency" to collect a pile of fees, and disappear. Investigate carefully before you make any payment. YOU also have legal responsibilities. You could be charged and prosecuted for mail or wire fraud if you use the mail or telephone to apply for credit and provide false information. It's a federal crime to make false statements on a loan or credit application, or to misrepresent your Social Security Number. For example, numerous "new credit file" claims urge you to obtain an "Employer Identification Number" (EIN) from the Internal Revenue Service, and use it as a new Social Security Number. Getting or using an EIN under such false pretenses may be criminal. Estate and Financial Planning - Providing Assets for the Future - 2 - 3 - 4 - 5 - 6 - 7 - 8